Advanced Search
MyIDEAS: Login to save this paper or follow this series

Financial sector-output dynamics in the euro area: Non-linearities reconsidered

Contents:

Author Info

  • Schleer, Frauke
  • Semmler, Willi

Abstract

We analyze the feedback mechanisms between economic downturns and financial stress for several euro area countries. Our study employs newly constructed financial condition indices that incorporate banking variables extensively. We apply a non-linear Vector Smooth Transition Autoregressive (VSTAR) model for investigating instabilities in the link between the financial sector and economic activity. The VSTAR model allows for non-linear dynamics and regime changes between low and high stress regimes. It can also replicate the regime-specific amplification effects shown by our theoretical model. The amplification effects, however, change over time. Specifically after the Lehman collapse, we observe the presence of strong non-linearities and amplification mechanisms for some euro area countries. Thus, these strong amplification effects appear to be related to rare but large events, and to a low-frequency financial cycle. Prior to the financial crisis outbreak we find corridor stability even if the financial sector shock takes place in a high stress regime. More important seems to be the shock propagation over time in the economy. Only with the occurrence of the rare but large events we find strong endogenous feedback loops and a loss of stability as described by the high stress regime of our theoretical model. The economy leaves the corridor of stability and is prone to adverse feedback loops. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/91722/1/777842564.pdf
Download Restriction: no

Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-068 [rev.].

as in new window
Length:
Date of creation: 2014
Date of revision:
Handle: RePEc:zbw:zewdip:13068r

Contact details of provider:
Postal: L 7,1; D - 68161 Mannheim
Phone: +49/621/1235-01
Fax: +49/621/1235-224
Email:
Web page: http://www.zew.de/
More information through EDIRC

Related research

Keywords: Vector STAR; financial stress; financial cycle; real economy; regime-switching; euro area;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Bohn, Henning, 2007. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(7), pages 1837-1847, October.
  2. Catherine Doz & Domenico Giannone & Lucrezia Reichlin, 2006. "A Two-step estimator for large approximate dynamic factor models based on Kalman filtering," THEMA Working Papers 2006-23, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  3. Schularick, Moritz & Taylor, Alan M., 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7570, C.E.P.R. Discussion Papers.
  4. Stefan Mittnik & Willi Semmler, 2013. "The Real Consequences of Financial Stress," SFB 649 Discussion Papers SFB649DP2013-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Paul De Grauwe, 2012. "The Governance of a Fragile Eurozone," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(3), pages 255-268, 09.
  6. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  7. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 102(4), pages 1692-1720, June.
  8. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Macro risk premium and intermediary balance sheet quantities," Staff Reports, Federal Reserve Bank of New York 428, Federal Reserve Bank of New York.
  9. Keith Kuester & Gernot J. Mueller & Giancarlo Corsetti & André Meier, 2012. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," IMF Working Papers 12/33, International Monetary Fund.
  10. Kirstin Hubrich & Timo Teräsvirta, 2013. "Thresholds and Smooth Transitions in Vector Autoregressive Models," CREATES Research Papers 2013-18, School of Economics and Management, University of Aarhus.
  11. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  12. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 119(1), pages 78 - 121.
  13. G. William Schwert, 1988. "Tests For Unit Roots: A Monte Carlo Investigation," NBER Technical Working Papers 0073, National Bureau of Economic Research, Inc.
  14. Skalin, Joakim & Teräsvirta, Timo, 1998. "Modelling asymmetries and moving equilibria in unemployment rates," Working Paper Series in Economics and Finance 262, Stockholm School of Economics, revised 05 Oct 1998.
  15. Willi Semmler & Lars Grüne & Marleen Stieler, 2013. "Using Nonlinear Model Predictive Control for Dynamic Decision Problems in Economics," EcoMod2013 5782, EcoMod.
  16. Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series, European Central Bank 1426, European Central Bank.
  17. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, American Economic Association, vol. 103(3), pages 117-20, May.
  18. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  19. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 387, Cowles Foundation for Research in Economics, Yale University.
  20. Semmler, Willi & Bernard, Lucas, 2012. "Boom–bust cycles: Leveraging, complex securities, and asset prices," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 81(2), pages 442-465.
  21. Godfrey, L.G. & Tremayne, A.R., 2005. "The wild bootstrap and heteroskedasticity-robust tests for serial correlation in dynamic regression models," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 49(2), pages 377-395, April.
  22. Sofiane Aboura & Björn van Roye, 2013. "Financial stress and economic dynamics: an application to France," Kiel Working Papers 1834, Kiel Institute for the World Economy.
  23. De Grauwe, Paul, 2012. "The Governance of a Fragile Eurozone," Walter Adolf Jöhr Lecture, University of St. Gallen, School of Economics and Political Science, Institute of Economics (FGN-HSG) 2012, University of St. Gallen, School of Economics and Political Science, Institute of Economics (FGN-HSG).
  24. Maximo Camacho, 2004. "Vector smooth transition regression models for US GDP and the composite index of leading indicators," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(3), pages 173-196.
  25. Kliesen, Kevin L. & Owyang, Michael T. & Vermann, E. Katarina, 2012. "Disentangling diverse measures: a survey of financial stress indexes," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 369-398.
  26. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
  27. Karim M. Abadir, 2010. "Is the Economic Crisis Over (and Out)?," Working Paper Series, The Rimini Centre for Economic Analysis 23_10, The Rimini Centre for Economic Analysis.
  28. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  29. Hubrich, Kirstin & D’Agostino, Antonello & Cervená, Marianna & Ciccarelli, Matteo & Guarda, Paolo & Haavio, Markus & Jeanfils, Philippe & Mendicino, Caterina & Ortega, Eva & Valderrama, Maria Teres, 2013. "Financial shocks and the macroeconomy: heterogeneity and non-linearities," Occasional Paper Series 143, European Central Bank.
  30. Mittnik, Stefan & Semmler, Willi, 2012. "Regime dependence of the fiscal multiplier," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 83(3), pages 502-522.
  31. Timo Teräsvirta & Yukai Yang, 2014. "Specification, Estimation and Evaluation of Vector Smooth Transition Autoregressive Models with Applications," CREATES Research Papers 2014-08, School of Economics and Management, University of Aarhus.
  32. Grune, Lars & Semmler, Willi, 2004. "Using dynamic programming with adaptive grid scheme for optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(12), pages 2427-2456, December.
  33. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," Discussion Papers, Columbia University, Department of Economics 0910-09, Columbia University, Department of Economics.
  34. Troy Davig & Craig Hakkio, 2010. "What is the effect of financial stress on economic activity," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 35-62.
  35. Tobias Adrian & Hyun Song Shin, 2009. "Money, liquidity, and monetary policy," Staff Reports, Federal Reserve Bank of New York 360, Federal Reserve Bank of New York.
  36. Schleer, Frauke, 2013. "Finding starting-values for maximum likelihood estimation of vector STAR models," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-076, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  37. Michiel Bijlsma & Gijsbert T. J. Zwart, 2013. "The changing landscape of financial markets in Europe, the United States and Japan," Working Papers, Bruegel 774, Bruegel.
  38. Kappler, Marcus & Schleer, Frauke, 2013. "How many factors and shocks cause financial stress?," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-100, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  39. Timo Teräsvirta & Yukai Yang, 2014. "Linearity and Misspecification Tests for Vector Smooth Transition Regression Models," CREATES Research Papers 2014-04, School of Economics and Management, University of Aarhus.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kappler, Marcus & Schleer, Frauke, 2013. "How many factors and shocks cause financial stress?," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-100, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:13068r. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.